2 Direct Marketing Risk Management Guide Introduction In Arkansas and across the nation, local food marketing has expanded beyond the farmers markets and food stands. Local farmers are marketing directly to public schools, hospitals, and institutions of higher education as well as directly to food retailers. One group of resources gaining popularity with producers and consumers alike are electronic marketing networks that gather information from producers and potential customers and give farmers greater access to local and regional markets. Large retail chains are also exploring how these tools can be used to increase market share by meeting customer demands for fresher, local grown foods. These new and emerging direct markets potentially offer benefits to producers by providing known and stable markets. However, before producers can realize the full potential of these new marketing avenues, several barriers must be overcome; marketing directly to retail and wholesale outlets presents additional issues that must be considered by producers. This direct marketing risk management guide was developed as an education program for producers interested in direct marketing their products. The guide contains 32 lessons in English, with 8 additional lessons in Spanish. The topics covered relate to marketing, legal, financial and business risks associated with direct marketing. For more information and to download these lessons visit: Jennie Popp, Ph.D. Associate Professor University of Arkansas Division of Agriculture Nathan Kemper Research Associate University of Arkansas Division of Agriculture Edition i

5 Acknowledgements This material is based upon work supported by USDA/CSREES under Award Number USDA/RMA under Award Number 08IE C iv

6 Non Discrimination Statement The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, age, disability, and where applicable, sex, marital status, familial status, parental status, religion, sexual orientation, genetic information, political beliefs, reprisal, or because all or a part of an individual's income is derived from any public assistance program. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (Braille, large print, audiotape, etc.) should contact USDA's TARGET Center at (202) (voice and TDD). To file a complaint of discrimination write to: USDA Director, Office of Civil Rights 1400 Independence Avenue, S.W. Washington, D.C or call (800) (voice) or (202) (TDD). USDA is an equal opportunity provider and employer. For more information, contact Bill Buchanan. v

8 Marketing Basics Lesson 1.1 Overview Learn fundamental concepts of marketing agricultural products and services Understanding marketing as the process of planning then executing pricing, promoting and distribution programs to satisfy customer needs Identifying markets, developing short- and long-term goals and the various stages in the life cycle of products Marketing is more than just selling a product or service; It is an essential part of the business Objectives 1) List the four essential elements of a successful business 2) Define marketing 3) Understand the 4 P s of marketing 4) Recognize the importance of short- and long-term goals 5) Become familiar with different marketing strategies Section 1-1

9 Four Essential Elements (successful businesses) 1) Technical skills (competencies) for your industry 2) Creating a Practical Business Plan 3) Dedication & Willingness to Reach Business Goals 4) Mastering a Basic Knowledge of business management areas Marketing Any activity or performance of an activity that involves the flow of products/services from the initial point of production/creation to the hands of consumers. Marketing is the flow of products and services to consumers and the transactions that facilitate or manage that flow. Marketing Marketing is based on the importance of customers to a business and has two important principles: All company policies and activities should be directed toward satisfying customer needs Profitable sales volume is more important than maximum sales volume Section 1-2

11 Place Place (and Time) Method used to get the product to your target market i.e., transportation, marketing channel utilized, market location. Working through established distributors or manufacturers' agents generally is easiest for small manufacturers. Small retailers should consider cost and traffic flow in site selection, especially since advertising and rent can be reciprocal: A low-cost, low-traffic location means spending more on advertising to build traffic. Place Direct Sales Reseller Sales: Through and Intermediary Market Coverage Intensive: widespread distribution Selective: distribution to a few businesses Exclusive: a single reseller Price Price The price of product involving factors such as cost of production, competitors prices, volume/quality issues, standard practices. The right price is crucial for maximizing total revenue. Generally, higher prices mean lower volume and viceversa; however, small businesses can often command higher prices because of their personalized service. Section 1-4

12 Pricing Strategy Cost-plus: Adds a standard percentage of profit above the cost of producing a product. Accurately assessing fixed and variable costs is an important part of this pricing method Value-based: Based on the buyer s perception of value (rather than on your costs). The buyer s perception depends on all aspects of the product, including nonprice factors such as quality, healthfulness, and prestige Pricing Strategy Competitive: Based on prices charged by competing firms for competing products. This pricing structure is relatively simple to follow because you maintain your price relative to your competitors prices. Going-rate: A price charged that is the common or goingrate in the marketplace. Going-rate pricing is common in markets where most firms have little or no control over the market price. Pricing Strategy Skimming: Involves the introduction of a product at a high price for affluent consumers. Later, the price is decreased as the market becomes saturated. Discount: Based on a reduction in the advertised price. A coupon is an example of a discounted price. Loss-leader: Based on selling at a price lower than the cost of production to attract customers to the store to buy other products. Psychological: Based on a price that looks better, for example, $4.99 per pound instead of $5.00 per pound. Section 1-5

13 Pricing Aspects Payment period: Length of time before payment is due. Allowance: Price reductions given when a retailer agrees to undertake some promotional activity for you. Seasonal allowances: Reductions given when an order is placed during seasons that typically have low sales. Bundling of products/services: Offering an array of products together. Pricing Aspects Trade discounts: Payments to distribution channel members for performing some function such as warehousing and shelf stocking. Price flexibility: Ability of salesperson or reseller to modify price. Price differences among target customer groups Pricing Aspects Price differences among geographic areas Volume discounts and wholesale pricing Early payment discounts: Policies to speed payment Credit terms: Policies that allow customers to pay for products at a later date. Section 1-6

14 Promotion Promotion Communicating to your customer about the product, place and price of your product. Promotion strategies include advertising and direct customer interaction. Good salesmanship is essential for small businesses because of their limited ability to spend on advertising. Marketing Mix Product Place Customer Price Promotion Long-Term Business Goals Directional Move you toward the general objectives of our vision statement Reasonable Are practical and obtainable; not extreme Inspiring Are challenging; affect you positively Visible Are easy to visualize Eventual Will be fulfilled at a future time Section 1-7

15 Long-Term Business Goals Examples of goals might be: Maintain a profitable operation Be considered the top producer in the county Be on the cutting edge of technology Be the premier supplier in the region Create employment for family members Short-Term Objectives are: Specific The objective achieves a particular, detailed result. Measurable There is a means to determine the objective. Attainable They are within economic and physical capabilities. Rewarding They are profitable and self-satisfying. Timed They have a specific timeline and/or deadline. Short-term term Objectives Examples of objectives might be: To increase gross revenues 5 percent each year To achieve percent return on equity within 4 years To reduce fixed expenses by 7 percent within 3 years Section 1-8

16 Importance of Goals the purpose of goals is to focus your attention and give you direction, not to identify a final destination. if a goal is good, it will provide you direction. John C. Maxwell What is strategy? Competitive strategy is about being different Strategy is the creation of a unique and valuable position in your industry or marketplace Activities are the basic units of competitive advantage Strategy is about choosing what not to do Marketing Strategies Identify Your Competitive Advantage Markets Existing New Existing Products & Services New Market Penetration Market Development New Product Related Development Diversification Section 1-9

17 Market Penetration Why? To dominate your existing market. How? Increase current customer product usage or get new customers. Firms either reduce price, expand distribution, or increase promotional activities. When? When market is growing. Market Development Why? To venture into new markets. How? Sell existing products in new markets; modify product; use different distribution; use different advertising/sales strategy. When? Present market is saturated. New Product Development Why? To satisfy buyer s needs How? New or improved product; through innovation or augmentation of a product When? Customer has a need or a problem; or firm is looking to enter new markets Section 1-10

18 Dollars Product Life Cycle Introduction Growth Maturity Decline Sales 0 Profits Time Diversification Why? Growth opportunities outside of current business How? New products for new markets When? Distinctive competencies are available. Firm possesses an advantage over competitors Marketing Strategies? 1) Notice your own buying strategies 2) Take an idea that works in one industry and use it in another 3) Be Specific, quantify your claims 4) Develop an Ability to see Your Customer s Perspective 5) Innovation 6) Systemization Section 1-11

19 Summary Marketing is everything that you do to communicate your product/service to your target market Business philosopher Jim Rohn said, First, have something good to say; Second, say it well; Third, say it often Summary Know your customer! Research and identify your marketing options and incorporate marketing plans into your business plan Utilize available resources available through government agencies, university, trade publications, and other sources Develop a well defined marketing strategy with a focus on creating value through differentiated product & service development References 1. Anderson, C. and C. Zeithaml (1984). Stage of the Product Life Cycle, Business Strategy, and Business Performance," Acad. of Management Journal, 27 (March), Borden, N.H. (1964). "The concept of the marketing mix", Journal of Advertising Research, Vol. 4 June, pp Ehmke, C., J. Fulton and J. Lusk (2005). Marketing s Four P s: First Steps for New Entrepreneurs. Purdue Extension Service, EC-730, May 5, Section 1-12

21 Acknowledgements This material is based upon work supported by USDA/CSREES under Award Number USDA/RMA under Award Number 08IE C Disclaimer of Liability This material is provided as an educational tool and is not a substitute for professional advice. Neither the University of Arkansas nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information disclosed in this document. Section 1-14

22 Introduction to Direct Marketing Lesson 1.2 Overview Learn how to analyze the potential market before entering into a new product offering Develop a marketing strategy based on the four P s of marketing Based on the marketing analysis, you will be more able to choose a direct marketing outlet and characterize your product in a way that makes it most appealing to your target audience Objectives 1) Be able to conduct a basic market analysis based on current market data in order to better estimate demand for your proposed product. 2) Understand marketing strategy based on the four P s of marketing: product, price, promotion, and placement. 3) Understand how the four P s apply to direct marketing venues. Section 1-15

23 Market Analysis Estimate marketing and production costs Identify your target market Identify your customers location Estimate your marketing area Assess the level of unfulfilled demand among consumers Estimate the market growth for your product Identify prices customers are currently paying Identify your competition s strengths and weaknesses Identify differentiating characteristics of your product Develop a Marketing Strategy Product be familiar with your product s differentiating characteristics and help the consumer identify with your product Price price high enough to generate a profit, but low enough to be competitive and attract customers Promotion advertising, customer relations, networking. This could include samples, recipes, a website, etc. Placement getting your product to the customer; distribution. The direct marketing venues. Characterization of The Product The definition of product includes The actual product Packaging Quality Features Brand name Conveys an image appealing to the target audience Section 1-16

24 Own Price Elasticity The estimated own price elasticity for many agricultural products can be found at P* = optimal price per unit MC = marginal cost ε = own price elasticity of demand TC = total cost TVC = total variable cost TFC = total fixed cost MC P* = 1 + ε TC MC = Q TC = TVC + TFC Own Price Elasticity Example Given ε of apples -0.4 TVC = 2.8Q TFC = 200 TVC + TFC = TC = 2.8Q TC/ Q = MC = 2.8 P* = 2.8/1+0.4 = $2 Pricing your goods based on your total cost assures that you cover your production costs Pricing Your Products Pricing represents the value of your product A price too low gives customers the impression your good is inferior A price too high will price many customers out of the market Do not set your price too low at the beginning of a season when competition is low and demand is high it proves difficult to increase prices later in the season Section 1-17

25 Pricing Your Products Prices can be higher when demand is high but supply is low, such as early crops or specialty products, such as organically grown produce Price competitively based on other producers prices Demand A change in quantity demanded is movement along the demand curve and is only caused by changes in price A change in demand is a shift in the demand curve and is caused by changes in The prices of substitutes or complements Consumer income Number of consumers Tastes and preferences Supply A change in quantity supplied is movement along the supply curve and is only caused by changes in price A change in supply is a shift in the supply curve (illustrated in next slide) and is caused by changes in Input costs Government policies Price expectations Weather or disease Technology Size of industry Section 1-18

26 Supply and Demand Price Demand Supply 1 Supply Quantity Types of Pricing Schemes Relative pricing Based on prices of your competitors Easier method, but may not be most profitable Local produce can command a higher price than imported due to freshness differences Cost oriented pricing Must know your costs of production (fixed and variable costs) Must determine your break even price (price per unit at which variable costs are returned) Must price above break even price to return a profit Promoting Your Product Even if you have the best product on the market, no one will know it exists unless you advertise Advertising informs your customers of The availability of the product The seasonality of the product Your location Differentiating characteristics of your product Promotion maintains customers during the season Promotion early in the season attracts new customers Section 1-19

27 Promoting Your Product Advertising and promotion may not be as effective in direct markets as in other sales outlets Promotion is more effective when products are Clearly differentiated Of very high quality Especially seasonal A novelty Differentiating your product with a name that makes customers feel like they have a personal relationship with you, the producer, is a low cost and effective promotional strategy. Arizona Extension Customer Survey How did you learn about this fresh farm outlet? Arizona Michigan Word-of-mouth; from friends or family 45.4% 51% Newspaper articles 14.6% n.a. Roadside signs 10.6% 21% Media advertising 9.3% 10% Fresh Farm produce brochure 3.4% n.a. Travel information centers n.a. 3% From other producers/businesses 4.2% n.a. Have you seen/heard the following advertisements? Arizona Roadside signage 68% Newspaper articles 49% Newspaper advertising 48% Fresh Farm Produce brochure 34% Radio advertising 11% T.V. coverage 9% Promoting Your Product Survey shows the most effective promotional strategies: Word-of-mouth; from friends or family Roadside signage Advertising moves a higher product volume in direct markets than price cutting Rule of thumb: 3% of gross sales spent on advertising Advertising to your target audience to make the most of your advertising dollars Section 1-20

28 Choose A Direct Marketing Channel 1. Roadside stand or on-farm marketing Most common system Location is vital to your success 2. Farmers markets Offsets disadvantage of production location Increased levels of consumer traffic Must predict sales in order to bring enough product Increased competition Choose A Direct Marketing Channel 3. Pick-your-own (U-pick) Least labor intensive for grower Better for crops intended for home processing Location is vital to your success 4. Community supported agriculture (CSA) Also called subscription farming or grower contracting Must have a wide variety available throughout the season Good for produce with special attributes, e.g. organic, gourmet, ethnic Can work with other growers to offer customers a wider variety than you can produce Choose A Direct Marketing Channel 5. Restaurant sales Exceptional quality necessary Need small quantities of products Delivery logistics Growing in popularity 6. Retail sales Some make purchases at the store level, others require higher-up decisions Buy larger volumes of product Prices must be competitive with an extensive market Section 1-21

31 Acknowledgements This material is based upon work supported by USDA/CSREES under Award Number USDA/RMA under Award Number 08IE C Disclaimer of Liability This material is provided as an educational tool and is not a substitute for professional advice. Neither the University of Arkansas nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information disclosed in this document. Section 1-24

32 Farmers Markets Lesson 1.3 Overview Introduce farmers markets as a direct marketing option Learn who benefits from farmers markets Learn about the farmers market nutrition program Becoming a member of a farmers market Objectives 1. Learn the steps to follow to sell products in the farmers market 2. Learn the advantages and disadvantages of selling a farmers markets 3. Learn strategies to reduce marketing risk at the farmers market Section 1-25

33 Farmers Market Stats A USDA farmers market study conducted by the Agricultural Marketing Service in 2000 (AMS, 2006) showed that: Farmers markets are an important source of revenue to producers. Farmers markets are self-sustaining (82 %). The income generated by farmers markets is sufficient to pay for all costs associated with the operation of the market. Farmers Market Stats The study reported that 19,000 farmers sold their produce only at farmers markets. 58 percent of markets participate in Women, Infant, and Children (WIC) coupon program, food stamps, local and/or State nutrition programs. 25 percent of markets participate in aiding food recovery organizations in the distribution of food and food products to needy families. Farmers Market Stats Shaffer and Cox (2005) estimated total sales at farmers markets to be $1 billion for year Same authors indicated that an average sales at individual farmers markets in 2005 totaled about $245,000 or $7,108 per vendor. 25 % of vendors surveyed relied on famers markets as their only source of farm-based income. Section 1-26

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